AIMA: Credit Hedge Funds Not 'Shadow' Banks

Mar 2 2012 | 8:20am ET

Credit hedge funds should not be considered part of the ‘shadow banking’ sector, according to the Alternative Investment Management Association, a hedge fund lobby group.

In a new research paper, AIMA says that credit funds “do not take deposits, do not offer daily liquidity nor otherwise hold themselves out as guaranteeing the return of the invested principal,” and therefore should not be lumped into the $60 trillion shadow banking sector that is currently in the sights of the G20-mandated Financial Stability Board.

AIMA says credit hedge funds “manage their liquidity profiles by agreeing investor redemption terms which correspond to the liquidity profile of the underlying investments. They therefore do not engage in significant maturity transformation.”

Moreover, the group says, hedge funds do not benefit from “implicit or explicit taxpayer guarantees.”

Said Andrew Baker, AIMA CEO, in a statement: “Credit hedge funds—and hedge funds in general—do not operate in the shadows. Managers are extensively regulated, are subject to reporting requirements and do not engage in any significant sense in credit, liquidity or maturity transformation, so their activity is not ‘bank-like’. Credit hedge funds do not belong in the same category as banks, let alone ‘shadow banks.’”

The FSB has said it will draft policy recommendations for regulations for the shadow banking sector covering five areas: the interactions of regulated banks with shadow banking entities and activities; money market mutual funds; other shadow-banking entities; securitization; securities lending and repos.

The concern expressed by regulators is that as the rules tighten for banks, risky operations will be undertaken by less regulated entities.

There is no one accepted definition of what constitutes ‘shadow banking,’ but regulators do often include hedge funds along with private equity and special investment vehicles.

Tiff Macklem, who chairs a key FSB committee, told Reuters in February that reforms should strike a balance between preserving the benefits of shadow banking, such as innovation and diversification, while limiting risks.

AIMA says credit and credit-related hedge funds comprise up to one-third of the global hedge fund industry and use a very diverse range of investment strategies, ranging from fundamental credit analysis and arbitrage to the trading of complex derivatives.

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